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Commodity Insite

Jerry Welch

Tue, 02/06/2018 - 2:54pm

The Chickens Are Coming Home To Roost

The first two columns I posted in this newspaper for 2018 were entitled, “Bubble of Historic Proportions” and “Month Not Yet Over.” Though the year is quite young and obviously subject to change, those two columns appear to be exceptionally and outstandingly prophetic. Allow me to explain.

My first column dated Jan. 5, I wrote the following, “ In the New Year, I suggest probing the short side of the US debt markets, T-bonds and T-notes. As inflation rises, the debt markets should work lower while at the same time commodities either go up down. The big story in 2018 will be the loud and I mean loud popping of bond market that is a bubble of historic proportions.”

My second column this year dated a week later I wrote the following. “Here in the first week of 2018 there were interesting developments that need to be noted in regards to several markets. They need to be noted because of the old saw, “as January goes, so goes the rest of the year.” Of course, the month is far from over and events of the first few weeks may be little more than a head fake for the rest of the month. Still, what unfolded in the first five days of this month are worth noting.”

During January, stocks and bonds held up well until this week. As it turned out, the week was wildly bearish with Dow Jones futures off 744 points, the worst one-day decline since June, 2016. Bond futures simply collapsed with the market falling to down to a level not seen since March, 2015. The day was a wreck!

What sparked the massive decline you ask? Here is the spin Bloomberg News is taking on pronounced weakness. “The Dow Jones Industrial Average tumbled 500 (but Dow futures were off 744 points) points in the biggest plunge since Donald Trump’s election, as a rout in the bond market spilled into equities.”

Bloomberg News goes on to state the following. “Strong jobs data that increased the likelihood the Federal Reserve will lift rates next month sent bond bulls scurrying and rattled equity investors who haven’t seen a week this bad in two years. The S&P 500 Index’s five-day rout topped 3 percent -- marking its first pullback of at least that much in a record 404 days. The 10-year Treasury yield popped above 2.85 percent for the first time since January 2014.”

I have stated time again the bond market was a bubble of historic proportions. Those that read my twice-a-day newsletter, Commodity Insite, know full well that I stated week in and week out to, “avoid the long side of any market” when bonds begin moving lower. I have also touted loudly the old adage, “as January goes, so goes the rest of the year.” My first two columns in 2018 were, thus far, quite prophetic.

In light of the train wreck taking place with stocks and bonds this week, here are some interesting comments from CNBC, with a headline that reads, “As stocks dive, a Merrill Lynch market gauge with a perfect record just flashed a red warning light.” The very first paragraph reads as such. “The frantic dash into stocks has hit a boiling point, causing a reliable indicator from Bank of America Merrill Lynch to flash a sell signal Friday.”

Further down in the article about Merrill Lynch is this paragraph that should scare the pants (or skirts) off those bullish stocks moving forward. “This is the 12th time that the "Bull & Bear" indicator has indicated a "sell" position dating to 2002, and each time has been accurate, the firm said in a note last week. The average peak-to-trough return is a drop of 12 percent.”

After Merrill offered their forecast about stocks several other big name firms did the same. Wall Street is now lining up on the bear side of the ledger when it comes to stocks and bonds. If the Merrill guess is right regarding the Dow, for example, it means it is headed to 23,000, give or take a bit. And what makes the Merrill forecast interesting is this. That particular indicator has never been wrong in 16 years. Quite a track record I say.

Stocks tripled since 2009. Bonds have been moving higher since August 1982 - 36 years ago. History shows that markets of all kinds are two sided. They don’t always go up. Nor, do they always go down. And the developments this week with both stock and bonds is basically what I hinted about in my first two columns of 2018. And what I hinted about was this old saw. “The chickens are coming home to roost” for stocks and bonds.